2024 Residential Housing Outlook

May 06, 2024

Too many would-be home buyers have encountered real estate investor Ray Brown’s maxim that “The best time to buy a home is always five years ago.” Volatile mortgage rates; limited inventory; rapidly rising prices; supply chain shortfalls; and remote work opportunities contributed to the overheated U.S. residential housing market. They also created an “affordability crisis” for many potential buyers.

However, in contrast to the hurdles facing potential homebuyers, another outcome of the crisis suggests modifying Brown’s maxim to state that “The best time to buy a homebuilders exchange-traded fund (ETF) is always five years ago”. As shown in the graphic below, the iShares Home Construction ETF (ITB) has risen 186% since April 2019, while the Standard & Poor’s 500 Index (SP500) rose 87%. Such differences confirm Albert Einstein’s observation that “In the midst of every crisis lies great opportunity”.

In this report, The Mather Group, LLC. (TMG) examines the recent state of this market. Our focus is on analyzing forces driving overall supply, demand and pricing, as well as offering our outlook for the balance of 2024. At 17% of Gross Domestic Product (GDP), the housing market remains an integral part of current economic growth.

Supply, Demand and Pricing

Total home sales in 2023 were not auspicious, with existing home sales of 4.09 million units falling 19% below 2022 levels—the lowest since 1995. New home sales of 666,000 units, or 14% of total 2023 sales, were equally weak. Key drivers of these tepid sales were factors affecting the overall supply of housing stock arising from events in prior years. For example, surging demand for new homes occurred at the pandemic’s 2020 outset due in part to the rapid growth in remote workers.

One result of this increased demand was the price of lumber and wood products used in new home construction soared 119% by May 2021 due to severe supply constraints. Shortages occurred because lumber mills and trucking firms lacked workers and drivers, so wages soared to attract and retain them during the pandemic.

These factors affected the state of the residential housing market and contributed to the emerging affordability crisis. More specifically, as shown in the graphic below, the relationship between new residential construction costs and national home price increases appears quite strong, especially in the pre-2022 period. This linkage is confirmed by the National Association of Home Builders which estimates construction costs comprise 61% of today’s new home sales price.

Another factor determining the supply of existing homes for sale arose from the Federal Reserve Board’s (Fed) near-zero interest rate policy beginning April 2020. Existing homeowners with mortgages at higher rates rushed to refinance at such historically low levels. However, as shown in the graphic below, after the 23-month period of zero rates ended in March 2022, the level of home mortgage refinancing had already fallen 93% from its earlier peak. Those who wished to refinance had indeed done so.

Because of this 2020-2021 refinancing spike, Bank of America estimated that 61% of all outstanding mortgages were at the rate of 4% or lower in Q1 2023—23% were even 3% or lower. The opportunity cost of selling an existing home with such low mortgage rates to purchase another property prevented many homeowners from selling. This factor continues to reduce the supply of existing homes offered today as mortgage rates still hover around 7%.

In addition, as occurred in the aftermath of the Global Financial Crisis, institutional investors, such as Blackstone, began purchasing homes not to resell but to offer as rental properties. At the March 2020 start of the pandemic, institutional investors were net purchasers of 14% of residential housing sales. This share then accelerated upward, reaching 29% by December 2023. Blackstone is now the third largest institutional investor, owning 62,000 homes purchased for $3.5 billion.

With greater capital resources, most institutions purchase with cash, eliminating mortgage delays and uncertainty for sellers. Due to their significant operational resources, investors often target homes requiring repairs or refurbishment which most individual buyers avoid. Obviously, their sizeable presence in the market is another factor that reduced the housing supply available to traditional homebuyers, increased prices and contributed to the affordability crisis through 2023.

Outlook

As affordability is a key determinant to the health of the housing market, it is important to note that its outlook is improving. More specifically, as shown in the graphic below, the National Association of Realtors’ Housing Affordability Index has reached 103%. This index tracks the ability of a median income household to obtain a mortgage to purchase a median priced home. A value of 100 or more means that a household has more than enough income to qualify for a mortgage, assuming a 20% down payment.

As a result of this Index rise—which increases potential buyers—median days for sale on the market, as reported by Realtor.com, have fallen from a post-pandemic high of 69 days to just 50 days. Should mortgage rates drop below their current 7% level, the median days on market could fall further, contributing to a more robust and affordable housing market.

Further good news, as shown in the graphic below, is that the decline in new housing starts ended April 2023, having fallen 25% on a year-over-year basis due to rising labor, land, building supply and mortgage costs. With these factors stable or declining, new starts have moved significantly upward in Q1 2024.

However, while mortgage rates may soon fall, two other cost components of home ownership may be moving in the opposite direction. More specifically, as shown in the graphic below, state/local property taxes and property insurance premiums have risen significantly in the post-pandemic period. Overall, expenses such as property taxes, utilities, maintenance, repairs and property insurance comprise more than half of homeowners’ annual costs, as reported in Fannie Mae’s 2022 analysis.

Severe weather risks in different geographic regions determine much of the rise in insurance premiums. For example, while the national average for annual home insurance premiums was $2,377 in 2023, it was $10,996 in Florida, or 363% higher. With respect to state and local property tax revenue, a significant increase in property assessments linked to soaring home prices explains its growth since July 2022.

Conclusion

Overall, TMG believes the post-pandemic state of the housing market is beginning to offer relief to potential buyers and sellers. While mortgage rates remain high and “sticky”, a potential Fed rate reduction in the latter half of 2024 could reduce this debt burden. If rates were to fall, then existing homeowners may reevaluate their reluctance to sell and move.

With new home construction rising, both factors could provide additional housing stock to alleviate recent home shortages and continuing price increases. And, with Bain & Company reporting remote work opportunities declined 20% in the last six months, this reduction could further alleviate some of the pressure in the housing market.

It is important to note that clients who adhere to their financial plan maintain the strongest pathway toward achieving their goals. Your trusted advisor at TMG is ready to respond to any questions or concerns you might have, and to help ensure that your financial plan remains both timely and actionable. Please reach out to your advisor for guidance and support at any time.

Sources: Bain & Company; Bank of America; BigCharts.com; Blackstone; Bloomberg; Bureau of Economic Analysis; Bureau of Labor Statistics; Census Bureau; CoreLogic; Department of Housing and Urban Development; Fannie Mae; Federal Emergency Management Agency; Federal Reserve Bank of St. Louis; Federal Reserve Board of Governors; iShares; Mortgage Bankers Association; National Association of Home Builders; National Association of Realtors; National Flood Insurance Program; Realtors.com; The Collected Papers of Albert Einstein; Wall Street Journal

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